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CONTENT : * Introduction * Definition * Types *Advantage :

CONTENT : * Introduction * Definition * Types *Advantage

Introduction: The responsibility centers represent the sphere of authority or decision point in an organization .for effective control, a large firm is usually divided into meaningful segments ,departments or divisions . :

Introduction: The responsibility centers represent the sphere of authority or decision point in an organization .for effective control, a large firm is usually divided into meaningful segments ,departments or divisions .

What is a responsibility center? *In simple words: an organizational unit for which a manager is made responsible. *Examples: A specific store in a chain of grocery stores. *A work-station in a production line manufacturing automobile batteries. :

What is a responsibility center ? * In simple words: an organizational unit for which a manager is made responsible. *Examples: A specific store in a chain of grocery stores. *A work-station in a production line manufacturing automobile batteries.

TYPES : for the purposes of evaluating financial performance and control , the responsibility centers are generally classified in to three categories: 1) cost or expenses centre 2) profit centre 3) investment centre :

TYPES : for the purposes of evaluating financial performance and control , the responsibility centers are generally classified in to three categories: 1) cost or expenses centre 2) profit centre 3) investment centre

1) COST OR EXPENSE CENTRE: *Responsibility centers whose employees control costs, but Do not control their revenues or investment level. Examples: Production department in a manufacturing unit, a dry cleaning business. :

1) COST OR EXPENSE CENTRE: * Responsibility centers whose employees control costs , but Do not control their revenues or investment level. Examples: Production department in a manufacturing unit, a dry cleaning business.

Two types of costs: 1)Engineered: those costs that can be reasonably associated with a cost center – direct labor, direct materials, telephone/electricity consumed, office supplies. 2)Discretionary: where a direct relationship between a cost unit and expenses cannot be reasonably made; Management allocates them on a discretionary basis (e.g. depreciation expenses for machines utilized). :

Two types of costs: 1)Engineered: those costs that can be reasonably associated with a cost center – direct labor, direct materials, telephone/electricity consumed, office supplies. 2)Discretionary: where a direct relationship between a cost unit and expenses cannot be reasonably made; Management allocates them on a discretionary basis (e.g. depreciation expenses for machines utilized).

2)Profit Centers: *Managers of profit centers control both the revenues and costs of the product or service they deliver. *It is like an independent business except it is part of a larger organization (e.g. departmental stores of larger chains – Wal Mart, restaurants, corporate hotels such as Hilton). * The store manager would have responsibility for pricing, product selection, and promotion:

2)Profit Centers: *Managers of profit centers control both the revenues and costs of the product or service they deliver. *It is like an independent business except it is part of a larger organization (e.g. departmental stores of larger chains – Wal Mart, restaurants, corporate hotels such as Hilton). * The store manager would have responsibility for pricing, product selection, and promotion

*Cost for these units vary depending on ability to control labor, waste, and hours. *Revenues also will vary depending on the unit’s service level, location, etc. *In other words, local discretion would affect revenues and costs. *Investments and some costs (e.g. centralized purchasing). *Therefore, profits represent a broader index of both corporate and local decisions. :

*Cost for these units vary depending on ability to control labor, waste, and hours. *Revenues also will vary depending on the unit’s service level, location, etc. *In other words, local discretion would affect revenues and costs. *Investments and some costs (e.g. centralized purchasing). *Therefore, profits represent a broader index of both corporate and local decisions.

Suitability of profit centers: 1) there exists a decentralized form of organization 2) The divisional manager has access to all relevant information needed for decision making. 3)The divisional manger is sufficiently independent. 4) a definite measure of performance is available. Advantages : 1)it may quicken the decision making process as these need not be referred to top management. 2)It helps in training divisional managers for top management responsibilities.:

Suitability of profit centers: 1) there exists a decentralized form of organization 2) The divisional manager has access to all relevant information needed for decision making. 3)The divisional manger is sufficiently independent. 4) a definite measure of performance is available. Advantages : 1)it may quicken the decision making process as these need not be referred to top management. 2)It helps in training divisional managers for top management responsibilities.

Disadvantages: 1)loss of top management control over different divisions. 2)too much emphasis on short term profitability . 3) transfer pricing problems amongst profit centre's. 3) INVESTMENT CENTRE: *Responsibility centers whose managers and employees control revenues, costs, and the level of investment. *It is also like an independent business (common when an organization acquires another organization – e.g:Sears financial centers). :

Disadvantages: 1)loss of top management control over different divisions. 2)too much emphasis on short term profitability . 3) transfer pricing problems amongst profit centre's. 3) INVESTMENT CENTRE: *Responsibility centers whose managers and employees control revenues, costs, and the level of investment. *It is also like an independent business (common when an organization acquires another organization – e.g:Sears financial centers).

Investment centre is two types: 1)return on investment/capital employed 2) economic value added 1) Return on investment/capital employed : return on capital employed establishes the relationship b/w profit and capital employed .the term capital employed refers to the total investment made in the investment centre /business. however ,net capital employed comprises the total assets used less its current liabilities. :

Investment centre is two types: 1)return on investment/capital employed 2) economic value added 1) Return on investment/capital employed : return on capital employed establishes the relationship b/w profit and capital employed .the term capital employed refers to the total investment made in the investment centre /business. however ,net capital employed comprises the total assets used less its current liabilities.

ROI / Capital employed = Net profit ------------------- *100 Capital employed 2) Economic value added/residual income approach: EVA has been considered as a better measure of divisional performance as compared to the return on assets (ROA) and ROI. :

ROI / Capital employed = Net profit ------------------- *100 Capital employed 2) Economic value added/residual income approach: EVA has been considered as a better measure of divisional performance as compared to the return on assets (ROA) and ROI.

TRANSFER PRICES A transfer price is a price used to measure the price of good or service furnished by a profit centre to other responsibility centre's within a company. TYPES OF TRANSFER PRICES: 1) COST PRICE 2) COST PLUS 3) Shared profit relative to the cost 4)Market price 5) Standard price :

TRANSFER PRICES A transfer price is a price used to measure the price of good or service furnished by a profit centre to other responsibility centre's within a company. TYPES OF TRANSFER PRICES: 1) COST PRICE 2) COST PLUS 3) Shared profit relative to the cost 4)Market price 5) Standard price